What Are Depreciating Assets?
All assets are not created equal. Some go up in value and some don’t. A depreciating asset is one that goes down in value over time. Examples of depreciating assets are cars, boats, motorcycles, computers, RVs and furniture. These assets will almost always be worth less than what you paid for them when you decide to sell them.
Many depreciating assets, such as cars, also have other costs associated with their ownership as well. Taxes, insurance, fuel and maintenance can all add up to make your total cost of ownership of a depreciating asset much higher than is reflected in the purchase price.
The difference between what you paid and what you sell the item for is your cost to own the asset. Not all items of the same type depreciate at the same rate. Luxury cars such as a BMW might depreciate at 20% a year, where as a Toyota Tacoma might only depreciate at 10% a year.
Take the depreciation rate into account when making a large purchase as it will greatly affect the total cost to own the asset. Not only would a BMW be double the purchase price of the Tacoma, but it would also depreciate twice as fast. This ultimately makes your total cost to own the vehicle 4 times as high!
Limit spending on Depreciating Assets
You will want to limit the money you spend on depreciating assets as much as possible. In general these assets will not help you to compound your wealth. You will need to purchase depreciating assets to live your life but don’t fool yourself into thinking that these material purchases make you wealthy. In fact they do just the opposite!
Every dollar you spend on a depreciating asset is one that you cannot invest. Due to the compounding nature of investment returns you can actually lose out on many times the original purchase price of the depreciating asset due to the opportunity cost.
Depreciating assets are generally material goods that you purchase to use. As they age they lose value, decreasing your net worth in the process. Limit your spend here so that you can concentrate on investing the savings instead.
Whatever your financial goals are, overspending here will make them harder to obtain.